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Saturday, February 09, 2013

Introducing a new devaluation modality: the political devaluation

A good explanation too...

UPDATED

The good thing about today's devaluation is that you do not need to be a PhD economist from S.U. to understand or to explain it. The regime has not done a devaluation for economic reasons or to solve macro problems that weigh heavily on the population. The regime today did simply a currency exchange measure to get some cash quickly to pay for the electoral campaign coming. That is all. All the problems that forced the regime into today's rate change loss of 32% remain and will carry on, forcing yet a new devaluation in, I guess, 6 months at the latest.

Let's see what is this novel form of devaluation: the political devaluation.

The context

We have heard increasingly that the regime cannot get any bailers. Before, when Chavez was in office, a certain insurance of political stability coupled with the willingness to pay loans through the nose made some willing to loan money. No more. Nobody is going to loan money to a country where the caudillo maximus has not been or heard of for 60 days. The more so when the understudies are noted for their personal corruption and extensive economic ineptitude.

At the same time, the missing leader looks more an more like he will return from the grave when he comes back. Thus there is an urgent need to plan for elections. The coffers are empty since all the cash has been spent in the fraudulent project to reelect the missing leader and his 20 dwarfs. The spending has been so reckless to buy votes that the formal economy has suffered a lot and is simply unable to pick up the slack now. Thus you cannot plunder the private sector further because, well, we will starve.

The magnitude

How much to devaluate was the question the regime really faced.

One did not have to be gifted with prescience to understand that the bolivar ex-fuerte should be at least at 10 for the dollar (1). I just did the exercise in my last trip to the US. I simply used the 10 for 1 criteria for all of my purchases, not the 4.3. If at 10 I found it adequately priced by Venezuelan standard I bought it without any second thought. Out of the 2,500 allocated for my trip by CADIVI I had no trouble spending in a week 2,200 using that criteria to chose what I should buy. At 4,3, of course, all was dirt cheap.

Thus if the regime had used any serious criteria it would have devaluated at the very least to 8, or a round number like, say, 7. But not 6,3. The choice of that number was purely political, to be able to say "just 2", "not even half of the 4.3". Though I suppose that they also calculated how much in fresh "income" would that bring to the regime for the election. And that is what they settled on, knowing full well that they were postponing the final blow by a few months at best. 6.3 gives them just enough to ford the the crisis right now.

The immediate consequences

Not that big. A lot of people have already been factoring a 6 to 8 exchange rate in their cost and sale calculations (we have been doing 6.5 since January 1, because our customers cannot tolerate more than that per the nature of our business; but in other fields they are already pushing 10). With an inflation already running above 20% annual, that devaluation may not push it more than 30% this year. The next devaluation at the end of the year is the one that will push it in the hyper inflation numbers of 50+.

The timing

This is where I admit difficulties arise. No one was truly expecting that the regime would devaluate before Maduro would be elected president. Even the regime for once hid its game rather well as all thought no devaluation was coming in the next few weeks. The only part clear about the timing is the choice of today, on the eve of a major holiday of 4 days, when all will have other things in mind, hopefully, than bitching at the regime. By Ash Wednesday when we return to work the regime will have come out with some new scandal to keep our minds off inflation.

Thus we are left to try to speculate on why they dared to devaluate BEFORE the election. In no particular order I offer you a few talking points.

- things are so bad that they could not wait any longer. Thus the mere 6.3 and the day chosen for it. Elections March 17 gambit.

- the elections are not going to be held until May at the earliest as Chavez does not finish his agony fast enough, or, alternatively the succession war is far from settled. The need of money to sort the succession, and the understanding that things were getting worse by the day made them decide on today hoping that the drama of the succession and Chavez funeral will keeps people mind elsewhere and not voting with their pockets.

- more simpler, they count on the Chavez grief to win and just need an extra push for a little electoral present giving to nail the deed. A 6.3 is enough to get enough money to import food and sundries through March and April for an early May vote. Then, the deity help us.

So there you have it, how a political devaluation is carried on, without regards on it will affect competitiveness, national accounts, inflation, etc. Mere details, you know.

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The morning after

Reader Eduardo points that I did not discuss the SITME. Certainly the SITME elimination has its importance but when I wrote the post late last night I had already enough arguments to make the point of the entry: a devaluation decided strictly out of political necessity and economical expediency.

And yet adding the SITME suppression would have actually strengthened my point so there it goes, a discussion on the SITME elimination.

The SITME was the system escape valve, where those denied CADIVI dollars could go. Its reach was limited because it could only be funded through national debt (bonds), because the amounts offered where relatively low and at any rate never amounted globally to much, maybe 20% of the foreign currency? It also was of no use since they tried to keep the SITME exchange as low as possible, below the 6.3 of today. In short, the SITME with its bias to insiders of chavismo was never an effective system to stem the rise of the dollar and the control of inflation. Still, it allowed for some important functions such as importing some non essential foods that made your life more tolerable or more importantly some spare parts and ingredients that were essential for the economy but that the regime ignored out of its congenital ignorance. Amen of allowing for some extra cash for those who needed to travel outside the country.

It is clear that the regime objective of yesterday was to reassess and refurbish the political control on currency exchange. Thus going above the SITME rate in theory would eliminate the need for the this one. Except that for this to work CADIVI needs to recognize again all of these imports that were made through SITME because CADIVI refused them. Will that happen? In the immediate future no but in the medium range (6 months?) a new "alternate" mechanism will have to be set in place because the 6.3 rate is untenable and the economic paralysis from not importing certain goods would become intolerable. BCV president Merentes yesterday was saying that business had dollar overseas to buy what they needed, that they should bring it back to the country. But with his poor performance yesterday sitting next to saurian Giordani he killed any confidence and trust he may have ever aspired to generate. Nobody, NOBODY, NOBODY will bring its savings in dollar unless it is a matter of personal life and death. At this point in Venezuela bankruptcy for many is the least of evils.

It should be noted also, along the SITME elimination, that the regime is setting yet a new layer of control. Now there will be a system that will decide discretionary who gets the ever scarcer dollars. That is, corrupt CADIVI will become a mere administrative office that will take your bolivares and give you the dollars. The decision will be made elsewhere. What this means is that dollars will become more than ever a tool for political pressure. Before, if you fulfilled certain requirements CADIVI gave you what you needed, even if incomplete, even if late. Now?

Thus this political devaluation is only going to lead to yet more corruption and more economic paralysis and more inflation. I bet you anything that by the end of the year we will be on the verge of hyperinflation How long will president Maduro hold when the hungry chavista hordes turn against him once Polar has been ransacked?

Conclusion

I forgot to put it in the post yesterday but I had tweeted it.

When Chavez was elected president and named Giordani to rule over the economy, the US dollar was around 0.5 bolivares. Today it is at 6.3. Do the math and figure yourself the abysmal failure of Giordani.....

Note that in previous devaluations Girodani took a back seat and even left office for a few months. This time he was as brash and mean as ever, blaming his own failure on others. I suppose that at some level he knows that history will be harsh with him and he tries to escape it by killing those across. Or some other Freudian approach.

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1) A few years ago when Chavez loped three zeroes from the currency without entering into any real fiscal policy he called the bolivar "bolivar fuerte", strong bolivar. It was then set at 2,15. Now it is at 6,3 to the dollar

4 comments:

The more things change, the more things stay the same. The Lusinchi government devalued from Bs 7.5 to Bs. 14.50 in 1987 (I think) for similar reasons. Except that oil prices were lower and the government was not funding massive public giveaways.

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